Incentive Schemes to air transport currently in force in Cyprus

Incentive Schemes to air transport currently in force in Cyprus 1. Objectives of Incentive Schemes Air transport in Cyprus is facilitated by the Larnaca and Paphos International Airports. On May 2006 an international consortium of stakeholders representing a mix of Cypriot and international partners namely Hermes Airports Ltd assumed management and control of Larnaca International Airport and Paphos International Airport, under a 25 year BOT (Built-Operate-Transfer) concession agreement with the Republic of Cyprus. The two airports serve 7,5 millions passengers in total annually. The State has introduced s to airlines serving the Cyprus airports in order to achieve specific objectives listed below: Significantly increase the volume of passengers and tourists travelling through Cyprus airports Reward airlines that make long term capacity growth commitments to Cyprus Open and stimulate new source markets for tourism to Cyprus Encourage the growth of winter and year-round tourism to the island Enhance the comparative advantage of Cyprus in the highly competitive tourism industry Significantly increase economic and financial benefits of tourism to Cyprus Incentive s are applied to Cyprus airports since 2010. 2. Description of current Incentive Schemes Three s were introduced in 2012: new, winter capacity and long term volume related. Additional s were launched in 2013 as described in section 7. All aid s are meant to support airlines; there is no aid for the airports themselves. Also it must be noted that aid is granted to airlines through Hermes Airports Ltd and not directly from the State. Of the three s, the long term volume related requires the highest degree of commitment to Cyprus by an airline over time. The airlines must be willing and able to commit to a growth development plan over a period of up to five years, by introducing new and frequencies on a year round basis. The long term large volume effectively reduces the airline s cost of operating on new to Cyprus by up to 25 per arriving passenger. Not all airlines, however, have sufficient resources, capacity or understanding of Cyprus as a destination to make a long term commitment. The new and winter capacity s are designed to reward airlines making shorter term commitments with the same net benefit of opening new tourism source markets and increasing airlift capacity to Cyprus. The smaller scale new provides up to 14 per 1 / 7

arriving passenger in cost reduction to airlines. The winter capacity of 10 per incremental arriving passenger is a specific targeted program designed to reward airlines for increased traffic on existing during winter season. There is no public service obligation in force in Cyprus and no direct support s for residents. Residents enjoy benefits from the s given by the State in an indirect way; strengthening the area s economy, lower plane ticket costs, access to new destinations, etc. These s were introduced on January 2012. Interested airlines were asked to express their interest for participation in any of the s until 31 st December 2013 by filling in an application form. 3. Routes Incentive Scheme An amount based on the table below will be offered to airlines that are increasing overall capacity to Cyprus by introducing new to either Larnaca or Paphos airports based on the criteria set forth in section 6 (Definition of new ). Table 1. Routes Incentives Scale Weekly Frequencies YEAR 1 YEAR 2 YEAR 3 YEAR 4 Euro per arriving passenger 7 14 12 11 10 6 14 12 11 10 5 14 12 11 10 4 12 11 10 9 3 11 10 9 8 2 10 9 8 7 1 9 8 7 6 Above amounts will apply as per the table below, which takes into account the total number of weeks that the new route will operate. Table 2. Routes Incentives Adjustment Scale 25% 0-6 weeks 50% 7-20 weeks 75% 21-32 weeks 100% Over 32 weeks 4. Winter Traffic Incentive Scheme An amount of 10 per incremental passenger will be offered to airlines that increase passenger numbers on existing operated to Cyprus during the winter season (November March) compared to the same period of the previous year. For clarity, airlines will have until December 2013 to enrol in the winter and to qualify an airline must carry at 2 / 7

least 5,000 passengers (in and out) during the winter period. The of Athens and London Heathrow are excluded from this. 5. Long Term Incentive Scheme Volume and Base Related An of up to 25 per departing passenger will be offered to airlines that: Commit to establishing a base in Larnaca or Paphos and/ or commit to a five year development plan to significantly increase arrivals to Cyprus. Operate new to/ from Larnaca, or Paphos from markets not previously served or markets deemed as underserved to be mutually agreed with Hermes Airports, based on the criteria set forth in section 6 (Definition of new ). The amount will be allocated based on a scaled approach ranging from 10 up to a maximum of 25 per arriving passenger if the total annual passengers exceed 500,000 per year. However while the rate is determined by the volume of total passengers flown in a year (in and out), the corresponding amounts are credited per arriving passenger basis. Table 3. Long Term Volume and Base Related Incentive Scale EURO Total Pax (Year) 10 14,040 11 28,080 12 42,120 13 56,160 14 70,000 15 110,000 16 150,000 17 190,000 18 230,000 19 270,000 20 310,000 21 350,000 22 390,000 23 430,000 24 470,000 25 500,000 6. Definition of Routes A route proposed by an airline will qualify as a new route if one of the following applies: i. If the proposed route has not been operated in the past 12 months, or has been abandoned by an incumbent carrier as recently as 3 months prior to introduction by the airline, provided that the route was served only by the incumbent carrier; or ii. If in the 12 months prior to propose a route start up, the destination was served with less than 20 return flights or total capacity of less than 10,000 one way passenger seats (5,000 arrivals); or 3 / 7

iii. If a scheduled service is offered year round on a route that has only been served seasonally by charters; or iv. For seasonal flights, if the route was not flown in the same season of the previous year; or v. If the destination airport is not within 100 km of an airport already served from Cyprus, or serves a different catchment area. Other conditions: i. Paphos and Larnaca are considered separate destinations. However, if an airline proposes a new route to Paphos that is already served to Larnaca (or vice versa), or is likely to negatively impact existing traffic to Larnaca (or Paphos) from an airport in the same region as the originating airport of the new route proposed for Paphos (or Larnaca), a cannibalisation test will be applied ensuring the stability of the existing traffic to Cyprus. ii. If a new route proposed by an airline qualifies for more than one, only one will apply. iii. An airline shifting capacity from destinations it serves from or to Larnaca or Paphos to other destinations, or shifting capacity between Larnaca and Paphos, will not qualify for a new route under any of the s s. However, if the airline is able to demonstrate that such a capacity shift will increase overall passenger traffic at the airports, the incremental passengers on that route may be incentivised. 7. additional s In parallel with the three s described above, Hermes Airports has introduced three new s to encourage traffic development. The new s are offered for a period of 12 months starting from 1 st June 2013. The new programs load factor based for selected in Larnaca airport, landing fee support for Larnaca and Paphos, and marketing support, are designed to share the airline partners risk when growing traffic to Cyprus in general and increasing traffic on underperforming in Larnaca airport in particular. 8. Load factor based for selected in Larnaca airport In an effort to support airline load factors and to encourage growth out of Larnaca airport, a discount will be offered to airlines operating out of Larnaka on selected underperforming indicated below in Tables 4 and 5. The discount will range from 5 up to 16 for each additional passenger over and above the threshold load factor1 (base load factor) presented in Tables 4 & 5 below. The actual load factor produced by each airline per season will be taken into consideration to calculate the relevant amount where applicable. For clarification purposes winter and summer periods coincide with the IATA industry wide definition. 4 / 7

To be eligible for the, an airline should not reduce seat capacity offered for the specific by more than 5%, compared to the previous respective season. If an airline withdraws from a route, Hermes Airports reserves the right to re-define the base load factor and/ or to withdraw the specific offer. Table 4. % Incentive amount on passenger fee (winter) LCA ROUTE BASE LOAD 5 11 16 FACTOR DISCOUNT DISCOUNT DISCOUNT ABU DHABI 67% 68% - 78% 79% - 89% 90% AMMAN 54% 55% - 69% 70% - 85% 86% ATHENS 69% 70% - 79% 80% - 90% 91% BAHRAIN 41% 42% - 61% 62% - 80% 81% BEIRUT 40% 41% - 60% 61% - 80% 81% BUCHAREST 64% 65% - 76% 77% - 88% 89% CAIRO 61% 62% - 74% 75% - 87% 88% DUBAI 43% 44% - 62% 63% - 81% 82% FRANKFURT 76% 77% - 84% 85% - 92% 93% HEATHROW 69% 70% - 79% 80% - 90% 91% HERAKLION 45% 46% - 63% 64% - 82% 83% PARIS 64% 65% - 76% 77% - 88% 89% ROME 53% 54% - 69% 70% - 84% 85% TEL AVIV 75% 76% - 83% 84% - 92% 93% THESSALONIKI 67% 68% - 78% 79% - 89% 90% WARSOW 68% 69% - 79% 80% - 89% 90% ZURICH 69% 70% - 79% 80% - 90% 91% Table 5. % Incentive amount on passenger fee (summer) LCA ROUTE BASE LOAD FACTOR 5 DISCOUNT 11 DISCOUNT 16 DISCOUNT AMMAN 66% 67% - 77% 78% - 89% 90% ATHENS 69% 70% - 79% 80% - 90% 91% BAHRAIN 55% 56% - 70% 71% - 85% 86% BEIRUT 57% 58% - 71% 72% - 86% 87% BUCHAREST 76% 77% - 84% 85% - 92% 93% DUBAI 50% 51% - 67% 68% - 83% 84% FRANKFURT 75% 76% - 83% 84% - 92% 93% HEATHROW 80% 81% - 87% 88% - 93% 94% HERAKLION 57% 58% - 71% 72% - 86% 87% KIEV BORYSPIL 80% 81% - 87% 88% - 93% 94% MUNICH 78% 79% - 85% 86% - 93% 94% PARIS 62% 63% - 75% 76% - 87% 88% ROME 40% 41% - 60% 61% - 80% 81% TEL AVIV 71% 72% - 81% 82% - 90% 91% THESSALONIKI 60% 61% - 73% 74% - 87% 88% WARSOW 70% 71% - 80% 81% - 90% 91% ZURICH 72% 73% - 81% 82% - 91% 92% 9. Landing fee support for Larnaca and Paphos The landing fee support is designed to encourage airlines to increase capacity on existing over the winter and/ or summer season. Airlines will be offered 100% discount on landing fees for any additional frequency introduced in the next twelve months on existing 5 / 7

either to Larnaca or Paphos. The discount will apply for one year from the first day of operation. 10. Marketing Support Marketing support may be offered to airlines growing the number of services to Cyprus, and increasing passenger traffic. The objective is to share part of the airlines risk in their efforts to stimulate traffic in line with the airline development strategy of Hermes Airports. This type of support will be used by airlines solely for marketing purposes. The following conditions should be met prior to any evaluation criteria: The proposal should refer to additional services introduced to/ from Cyprus. The period of operation of the new service should be at least 40 weeks per calendar year. Evaluation criteria: Market development potential (new market, key developing markets, existing market) Passenger and revenue potential (high, medium, low) Airline commitment in Cyprus (single operation, multiple, base of aircraft) Marketing support can only be used to finance marketing activities that may increase passenger traffic and Hermes Airports and the airline have to agree upon a specific marketing plan in advance. The total amount of marketing support to be provided to the airline, over a winter and/ or summer season, will be calculated based on the seat capacity offered in the market and will be subject to funds being available in Hermes Airports annual marketing support budget for the period November 2013 October 2014. If a full calendar year is not flown, a pro-rated amount may be given. Hermes Airports reserve the right to revise the criteria for marketing support as appropriate, or to cancel the program at any time. Hermes Airports also reserves the right to refuse to apply the program if, in Hermes Airports sole opinion a route proposal does not meet the criteria listed above. 11. Evaluation of the mechanisms in place and concluding remarks Aid s in force in Cyprus airports have been a successful story so far; about 24 airlines with 44 new have taken use of the s offered and the volume of passengers and tourists travelling through Cyprus airports has increased by 800,000 passengers since 2012. In particular passenger traffic from the Russian market was increased by 35% in 2012 compared to 2011 respective season. However the usefulness or long term success of the above aid s cannot be fully evaluated at this stage, especially in the case of a small island state that faces all insularity constraints and is at the same time 6 / 7

peripheral to the EU. The effectiveness of the s remains yet to be seen in the long run. It is therefore important to further assess such policies in the case of those islands that strongly depend on air transport, as opposed to continental countries and their close island regions, which can experience other even more effective modes of transport. The cost of transport varies even amongst islands, were for some this remains relatively high. Unfortunately, transport affects the price of tourist packages and consequently the flux of visitors to a tourist destination. It is therefore not unusual to experience, because of that factor, much higher tourist numbers in specific small islands that do not provide the quality of accommodation and services of islands of bigger size. Ermis Klokkaris Skevi Makariti Department of Town Planning and Housing, Cyprus October 2013 7 / 7